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November, 2006

U.S. Tobacco Cooperative

U.S. Flue-Cured Continues to Rebound
With Exports Up Significantly

By John Parker

Shipments of flue-cured tobacco to China and Europe help account for an overall 75% increase during the January through August, 2006 period.

The long-awaited large shipments of U.S. flue-cured tobacco to China occurred in early 2006. The export of 8,288 tons to China plus gains to the EU and Switzerland pushed total shipments up by 75.2% during January-August 2006 (recent period) to 41,400 tons, for a value of $269.1 mn. U.S. flue-cured tobacco exports had drifted downward steadily from $660.9 mn in calendar 2002 to a low of $420.5 mn in 2005.

Some cigarette factory experts that prepare brands of blended cigarettes like to use some U.S. tobacco for a number of reasons. The response from smokers is considered important. If smokers are told that flue-cured tobacco from Zimbabwe was used, but the cigarette contains no U.S. tobacco, some of them may ask where they can find a brand with U.S. flue-cured tobacco. Flavor and aroma for U.S. flue-cured tobacco is usually considered more favorably than that from some other countries. The method of curing U.S. tobacco to reduce dangerous components tends to be a factor.

A steep reduction for exports of tobacco grown in Zimbabwe from 223,000 tons in 2001 to only about 60,000 tons in the recent year left a gap in world trade of flue-cured tobacco. For a while Brazil appeared to fill the gap. It now appears that factory managers in many countries wish to obtain some U.S. tobacco rather than place all of the newer purchases from traders providing tobacco grown in South America.

Lower Average Export Price Contributes to Increased Exports: Part of the boost for shipments in early 2006 came from a reduction of 10.3% for the average price for U.S. flue-cured tobacco to $6,500.82 in the recent period. Even further reductions are likely as the exports of lugs go to some countries at a relatively low price. Banking for purchases of U.S. tobacco is usually more efficient than imports from some countries with multiple exchange rates. Zimbabwe has multiple exchange rates, and farmers there receive half of their payment in a convertible currency rather than all of the receipts being paid in local currency. Declining purchasing power of the Zimbabwe currency has been a problem for farmers in various aspects.

The concern expressed by some traders in China that U.S. tobacco is better quality than recent deliveries from Zimbabwe contributed to the recent surge in exports to China.

Importers in some other countries may evaluate the way experts in China chose U.S. tobacco after a quality analysis. Prospects for expanding U.S. flue-cured tobacco exports to a number of countries are favorable. Competition from Brazil, Argentina, and China remains strong. Dealing with the lower prices usually offered by these competitors will tend to influence the prospects for further expansion in exports.

New Markets Opening: New potential markets are likely to show more promise as U.S. exporters contact importers in those countries. It is interesting to observe the way new markets evolved in the last several years. Romania, Hungary, Czech Republic, and Lithuania were interesting new markets for U.S. flue-cured tobacco with significant purchases in the last several years.

Rebound Underway for Sales to Some Major Markets: The lower average price is also likely to contribute to gains in some established leading markets. U.S. exports of flue-cured tobacco to Germany more than tripled in the first eight months of 2006, reaching 8,177 tons valued at $51.6 mn. This was partly a rebound from the low of $90 mn for shipments to Germany in 2005, following a downward drift from the peak exports valued at $168.2 mn in 2001. Smaller imports of tobacco from Zimbabwe may have contributed to the rebound for German imports from the United States. German cigarette exports to some new members of the EU soared in 2004 and 2005. Blended brands containing U.S. flue-cured and burley tobacco contributed to the rise for German cigarette exports to a peak of 146 bn pieces in 2005. This meant that Germany moved to first place in the world among cigarette exporters in terms of quantity. Greater use of U.S. tobacco for manufacture of quality blended cigarettes is likely in the future.

Dutch cigarette exports reached a peak of $2.8 bn in 2003, but declined slightly by 2005 as competition from Germany tended to lower the Dutch share for imports by EU countries. Exports of U.S. flue-cured tobacco to the Netherlands increased sharply in 2005 to 6,338 tons, and continued to rise in early 2006

Denmark was a steady market for U.S. flue-cured tobacco in early 2006. However, U.S. shipments of flue-cured tobacco to Denmark declined from a peak of $3.7 mn in 2003 to a low of $11.8 mn in 2005. Several versions of the high quality House of Prince brand produced in Denmark are popular at home and also in some other EU countries. Lower U.S. prices may have contributed to a rebound for shipments to Denmark, partly because of some opinions that the quality for imports from some other suppliers are considered to be less than what they once were.

Recent Decline to Some European Markets Might Shift to Gains Depending on Prices: A steep decline for U.S. exports of flue-cured tobacco to Belgium-Luxembourg from $109.4 mn in 2004 to only $12.8 mn in calendar 2005 was followed by an even more severe setback in early 2006, with shipments valued at only $324,000. Apparently some Belgian cigarette manufacturers may be reducing stocks and waiting for lower prices under the new setting with no more guaranteed prices in the U.S. market.

The French market for U.S. flue-cured tobacco blinked out in early 2006. This indicates that some managers of French cigarette factories may be watching price movements of U.S. exports. France is a large importer of tobacco from Latin America and Africa. U.S. exports of flue-cured tobacco to France declined from $14.9 mn in 2004 to $10.3 mn in 2005.

Spain has been the boom import market for cigarettes in recent years, with large arrivals from Germany, Netherlands, and France. Efforts to lessen growth for sales of imported cigarettes apparently contributed to a emphasis on increased imports of quality tobacco. U.S. exports of flue-cured tobacco to Spain increased doubled in valued during the recent period, reaching 3.25 mn. This followed a steep decline for flue-cured exports to Spain from $29.2 mn in 2004 to only $2 mn in 2005.

Portugal was missing as a customer for U.S. flue-cured tobacco in early 2006, and shipments had declined from $13.8 mn in 2003 to $5.8 mn by 2005. Portugal had greater cigarette exports to other EU members and to North Africa in recent years, thus adding to the prospects for increased imports of quality tobacco for blending.

Italy is usually the second major world cigarette importer, following Japan. The arrival of large quantities of cigarettes from Germany, Netherlands, and France has limited prospects for expansion of domestic output. Efforts to compete with imports sold in supermarkets and tobacco shops have included projects to produce more quality cigarettes in Italy. U.S. exports of flue-cured tobacco to Italy declined from $10.8 mn in 2004 to $5.2 mn in 2005, followed by a modest rebound to $3.2 mn in the recent period.

Some decades ago the leading export market for U.S. flue-cured tobacco was the UK, but shipments to that market declined from $12 mn in 2004 to $9.3 mn in 2005, before taking a steep dive of 75% to only $1.7 mn in January-August 2006. Apparently, smaller deliveries of Zimbabwe tobacco may cause UK imports of flue-cured tobacco to rise from either the United States or South America. UK cigarette exports to the Far East remain substantial and the quality for premium cigarette brands is important for maintaining sales in the competitive export markets.

Swedenís experience with very high taxes on cigarettes and high prices provides an example of how too much excess can result in lower tax revenue. A reduction for taxes on cigarettes to a more reasonable level contributed to a rebound for tax collections. When the retail price for cigarettes in Sweden dropped from over $7 per pack of 20 to a range of $5, more smokers bought their cigarettes at stores in Sweden. Previously many smokers took trips to Germany, Estonia, and other places where less costly cigarettes could be purchased. U.S. exports of flue-cured tobacco to Sweden increased 37% to 158 tons in the recent period, and the value rose 22.5% to $1.13 mn.

Dramatic Gains Made to Some of the 10 New EU Members Recently: U.S. exports of flue-cured tobacco to the 10 new EU members joining in 2004 zoomed from $277,000 in the first seven months of 2005 to $5.3 mn in the comparable months of 2006. Much of the increase came from the way shipments to Hungary rose from $444,000 in January-July 2005 to $4.9 mn in the comparable months of 2006.

Lithuania opened as a new customer for U.S. flue-cured tobacco with purchases valued at $1.6 mn in 2004, followed by sales for $4.2 mn in 2005, but a lack of repeat business in early 2006. Lithuaniaís smokers have increased purchases of cigarettes from Germany and Russia recently. Lithuaniaís factory managers apparently seek to produce more blended cigarettes to cope with competition from imports. U.S. exports of flue-cured tobacco to Lithuania increased from $1.6 mn in 2004 to $4.2 mn in 2005, but were missing in early 2006.

Poland was a customer for $10.5 mn worth of U.S. flue-cured tobacco in 2005, compared with $1.7 mn in 2004, and deliveries to Poland were valued at $463,000 in early 2006. Polandís cigarette manufacturing ownership underwent dramatic changes in preparation for entry into the EU in 2004. Improvement in the quality of cigarette output was made to cope with a more open path of imports. Also, Poland became a greater exporter of cigarettes to new markets in some countries in Africa and to Iraq.

Czech Republic was a star among growing markets for U.S. burley tobacco in recent years. U.S. exports of flue-cured tobacco to Czech Republic increased from $435,000 in 2004 to $1.5 mn in 2005, but were completely lacking in early 2006.

Russia Is a Potentially Larger Market: Russian imports of flue-cured showed a strong upward trend in the recent decade, although most of the increased deliveries came from China, Brazil, and Zimbabwe. Without the large arrivals from Zimbabwe reported earlier, the need for imports from other sources will rise. Russia imports about 99% of the leaf tobacco used in cigarette factories. Russia was the leading customer for U.S. burley exports in 2004, and the emphasis on producing high-quality blended cigarettes by multinationals brought gains for U.S. flue-cured tobacco on a somewhat later schedule.

U.S. exports of flue-cured tobacco to Russia increased from $4.7 mn in 2003 to $14.4 mn in 2004 and $20 mn by 2005. This placed Russia in sixth place among export markets for U.S. flue-cured tobacco in 2005, following Germany, Japan, Netherlands, Switzerland, and Malaysia. Shipments of U.S. flue-cured tobacco to Russia increased 16% in the recent period to 872 tons, for an average price of $6,701.83 per ton, compared with $7,141.89 per ton in calendar 2005.

Romania Likely to Boost Imports as Efforts to Improve Cigarette Quality Expand: Romaniaís cigarette industry has faced a number of changes recently with large foreign investments and gains for imports from Germany and some nearby countries. U.S. exports of flue-cured tobacco to Romania began with shipments valued at $1.7 mn in 2003 and deliveries expanded to a value of $3.2 mn by 2005. Shipments to Romania were off by a fifth in the recent period to 320 tons, but efforts to provide a wide range of products might result in higher sales in the future.

Japanís Imports Likely to Rebound: Japan was a customer for $121 mn worth of U.S. flue-cured tobacco in 2001, but by 2005, the valued had drifted down to $66.4 mn, and the value slipped to only $26,000 in the first eight months of 2006. It appears that cigarette factory managers in Japan are waiting to find lower prices for U.S. flue-cured tobacco in the future. Brazil and Argentina appear to have filled much of the gap left by smaller arrivals of tobacco from Zimbabwe.

Philippine Purchases Up: U.S. exports of flue-cured tobacco to Philippines nearly tripled January-August 2006, reaching $5.6 mn for an average of $4,167.53 per ton, compared with $7,629.71 in calendar 2004. The large Philippine imports of cigarettes from Hong Kong, China, and Singapore contributed to greater imports of quality tobacco to cope with imports. A strong surge for Philippine cigarette exports in 2004 resulted from sales to Association of Southeast Asian Nations (ASEAN) trading partners. Efforts to maintain significant cigarette exports may spur greater purchases of U.S. tobacco in the future.

Exports to South Korea Up Sharply: South Korea had some astonishing gains for cigarette exports to CIS countries in Central Asia during 2001-04, before competition from European exporters caused a dip in their sales to those markets by 2005. Efforts to improve the quality of cigarettes contributed to Korean export gains. U.S. exports of flue-cured tobacco to South Korea doubled in the recent period to 3,085 tons, as the average export price fell to $4,757.88 per ton.

Exports to Malaysia Steady: U.S. exports of flue-cured tobacco to Malaysia declined 1% to 1,126 tons in the recent period. Competition from China, India, and Brazil contributed to a decline for U.S. flue-cured tobacco to Malaysia from 4,876 tons in 2001 to 2,800 tons by 2005.

Competition Hampers Sales to Indonesia: Indonesia was a customer for 2,163 tons of U.S. flue-cured tobacco in 2005, but shipments during the recent period were off by 30% to 1,017 tons. Exports of cigarettes from Indonesia to Southeast Asia recently were below earlier peaks because of competition from Hong Kong, Philippines, and some EU countries.

Vietnam Is a Growing Market: Vietnam is a large importer of tobacco from China for the expanding cigarette output. U.S. exports of flue-cured tobacco to Vietnam showed an upward trend from shipments of 58 tons in 2001 to 528 tons in 2005. This was followed by a 37% rise to 316 tons in the recent period.

Strong Rebound Reported for Exports to Australia: Australia was a growth market for U.S. flue-cured tobacco during January-August 2006 when shipments soared to 1,398 tons, valued at $8.8 mn, compared with $1.2 mn in calendar 2005. Adverse weather reduced crop yields in Australia in 2006.

Mexico Renews Purchases: U.S. exports of flue-cured tobacco to Mexico were 255 tons in the first eight months of 2006, after a lack of business during 2004 and 2005. The peak for shipments to Mexico was the delivery of 580 tons in 2002. Efforts to improve the quality of blended cigarettes are underway. Mexico has substantial gains for cigarette exports recently.

Transit Trade May Enhance Future Sales to Swiss Traders: Swiss tobacco traders buy more tobacco on the world market than they deliver to cigarette factories in Switzerland. This is because they have supplies available for shipment quickly stored in some European ports for sale to buyers from a number of countries. U.S. exports of flue-cured tobacco to Swiss traders zoomed from 250 tons in the first eight months of 2005 to 5,768 tons in the recent period. Swiss traders may be able to find extra markets for the lower leaves of flue-cured tobacco.

U.S. exports of flue-cured tobacco to Switzerland declined from a peak of 7,391 tons in 2001 to a low of 2,469 tons in 2004, before rebounding to 4,345 tons in 2005, valued at $27.6 mn. Swiss cigarette exporters lost sales to the EU and Russia between 2003 and 2005. Newer markets were found in the Middle East and Africa to help Swiss cigarette exporters to maintain shipments in the range of $300 million annually.

Rebound for Exports to Turkey May Depend on Prices: Turkey was a customer for 2,339 tons of U.S. flue-cured tobacco valued at $15.6 mn in 2005, but shipments were only 193 tons in the recent period. Prospects for greater cigarette exports to Iran and Iraq may contribute to significant sales to Turkey in the future.

Exports to Nigeria Up: U.S. exports of flue-cured tobacco to Nigeria increased 187% in early 2006 to 165 tons. Nigeriaís cigarette imports were up to about $100 million in some recent years. Efforts to produce higher-quality blended cigarettes are likely to boost future imports of tobacco into Nigeria.

Exports to Canada Below Earlier Peaks: Canada expanded flue-cured tobacco production after U.S. production controls began in the late 1930s, and has remained a significant net exporter in recent years. U.S. flue-cured tobacco exports to Canada declined from 729 tons in 2001 to 105 tons by 2005, and then fell 43% to 53 tons in the first eight months of 2006.


Tobacco International - November, 2006

SMOKE Magazine - Cigars, Pipes, and life's other desires


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